Chief U.S. District Judge Gerald Rosen oversaw the confidential discussions between Emergency Manager Kevyn Orr, attorneys representing the city and creditors. / Chief U.S. District Judge Gerald Rosen

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and Brent Snavely

The City of Detroit and creditors reached an agreement this morning after two days of negotiating to settle a disastrous Kwame Kilpatrick-era debt deal that cost the city potentially hundreds of millions of dollars, according to a federal court spokesman. / Mary Schroeder/Detroit Free Press

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The City of Detroit will pay $65 million less than previously planned to two banks owed nearly $300 million under terms of a landmark settlement announced in federal bankruptcy court on Tuesday.

The agreement was the result of two days of intense negotiations overseen by U.S. District Chief Judge Gerald Rosen, who was assigned to be a mediator in Detroit’s bankruptcy case.

Under the new terms, Bank of America and UBS are to receive $165 million from Detroit on their $293-million debt instead of a $230-million payout to which Orr and the city’s attorneys previously agreed.

The new agreement, which must still be approved by Rhodes, will free up about $15 million in monthly casino revenue that will be spent on city services, according to Orr’s office.It also means a proposed $350-million loan to Detroit from London-based Barclays will be reduced to $285 million.

“This is an important development for the city and its residents because it means we can start moving forward on implementing needed investments in public safety and services,” Orr said Tuesday in a statement. “This agreement represents a significant reduction from the original deal struck with the banks. The banks and the city, through mediation, and with the mediator’s recommendation, have accepted the reduction in terms.”

The agreement would settle a disastrous Kwame Kilpatrick-era debt deal from 2005 that cost the city potentially hundreds of millions of dollars. It would pay the banks about 43 cents on each dollar of debt owed by the city. The previous agreement was to pay 75 cents to 82 cents on the dollar.

Orr also has said the agreement is critical for the city’s reorganization because it will free up additional cash from casino tax revenue to operate the city.

Under the old agreement, about $4 million per month is deposited in a “holdback account” as collateral in case the city defaults on its payments. The new agreement will free up about $48 million in additional annual revenue, allowing the city to directly collect about $180 million annually in casino revenue.

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The new terms also are a partial vindication for some of the city’s creditors, including unions and pension funds, who raised concerns about the original agreement and whether the city was paying the banks too much.

Still, there are signs that even the new agreement will be challenged in bankruptcy court.

“The new deal is better, but that is not saying much,” Robert Gordon, an attorney with Clark Hill said Tuesday in an e-mail. “The retirement systems intend to continue their opposition to the swaps settlement, as revised.”

Rosen was appointed to lead mediation efforts in Detroit’s historic bankruptcy. Orr attended the mediation sessions, along with members of the city’s bankruptcy legal team and lawyers representing creditors involved in the deal.

The agreement was reached before noon on Tuesday. After the confidential mediation session wrapped up, Rosen called the parties into his courtroom to discuss it in open session.

“This is — I think it’s the first, I think it's fair to say, significant agreement in the bankruptcy,” Rosen said at the conclusion of the settlement hearing, according to the transcript.

“This does represent our view of the settlement and it is my recommendation that the settlement be approved as allocated here today,” Orr said, according to the transcript.

Syncora, an insurer that guaranteed the payments to UBS and Merrill Lynch, was not present at the settlement hearing. Syncora was vehemently opposed to the original agreement. An attorney for Syncora did not respond to e-mails and a phone call on Tuesday.

Rhodes, who’s presiding over Detroit’s Chapter 9 proceedings, ordered the city to renegotiate its deal with Bank of America and UBS, saying the city’s original settlement was too lucrative for the banks.

On Friday, Detroit threatened to sue the two banks if they won’t agree to better terms in a deal to settle the complex pension debt interest-rate transaction called “swaps,” which cost the city about $50 million a year, or 5% of its revenue.

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Rhodes’ order to renegotiate threatened the fast-paced flow of the bankruptcy proceedings.

Orr has promised that his team would present to the judge a plan of adjustment in January that will spell out what cuts and restructuring the city plans to undertake in order to claw its way out of bankruptcy.

But that January time frame hinged on Rhodes quickly approving the original swaps settlement. When he ordered all parties back to the negotiating table, a long, protracted process would have pushed Orr and his adjustment plan off course.

Part of the original plan called for Barclays to finance about $350 million to pay off the previous deal, with the remainder of the money to be spent on city services such as public safety and blight removal. Rhodes said the banks were getting too much and ordered the city to renegotiate.

The Barclays loan now will be reduced to $285 million to reflect the new deal, according to Orr’s office. Still, about $120 million of the Barclays loan will be used to bolster city services, which was the same amount set aside for city services under the previous settlement.

The new deal and the amended Barclays loan will be considered at a Jan. 3 hearing before Rhodes.